Esops can change your life. They are probably the most valuable contribution that Startups make to the lives of employees who suffer low salaries and long hours while working in new Companies. However, ESOPs as a concept is confusing and complicated and needs to be understood well. 

This is a humble attempt to demystify ESOPs.

[Ps - If you are browsing via a mobile device, click on the IN logo (linkedin) and directly view this deck on slideshare. The UX is much better :-)]

Hope this was helpful! Please provide feedback!


Please download the presentation via the image link:
added by asha
there was a q in quora on this topic:
'How do I split equity between my new co-founder and I on a side-project I have been working on for over two years, put money in, and brought initial users for?'
Alok's answer: 
"Let me dive directly into the sweet problem:

- Lets assume that you have invested 400 hours into the project

- Lets assume that your market value is US$ 25 per hour

- You state that you have invested 5000 US$ into the project

Therefore the 'capital' invested into the venture by you is = (400*25) + 5000 = US$ 15,000

- Now let's assume that your friend puts in 500 hours in the next few months

- His value in the market is US$ 30 per hour

After he has put in his hours, the 'capital' invested by him will be US$ 15,000

Total Capital of the Company now will = US$ 30,000

Both of you will therefore own 50% each.

- Lets assume that you also continue to contribute while he is involved

- Lets assume that you add another 200 hours

Your capital invested in round 2 will be = US$ 5000

Total Capital created will be 15K + 15K + 5K = 35K

Your share will be 20/35 = 57.15%
Your friends share will be 15/35 = 42.85

This formula can be used to add capital to the pool and reward the contributors (be it via cash, effort, employees (the amount they DO NOT take home in cash) etc."

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Thanks.. This Answers a lot of questions I always had.. !! 

Alok - Again a masterpiece and a very useful repository of valuable information. Thank you and please keep sharing! Question though - Can you elaborate a bit on the contractor/consultant situation? I am currently working with multiple senior folks who are helping me in a part time capacity. Given that their contributions are important, I want to include them in the ESOP pool. Your response will help me out quite a lot. 

Hi Alok, 

Terrific guideline document . Only yesterday I was talking to our corporate attorney for ESOP and he said he wont do ESOP for a startup because its too complicated. Your compilation answers most of the questions comprehensively and will be a great guidelines for all the employees in our company. 

I still have doubt over how you keep a face value of 10 to the VC and Re 1 for the employees.. Can we have shares of different face values at any given instant ?

Thanks for the compilation. I would nominate this for Oscars of Indian startups


the 'face' value of the shares are the same = Rs 1

The 'premium' we sell them to the VCs is Rs 4999 = Total Rs 5000

Ur Gyan is like bible of  startup :) Awesome piece crisp n clear 


Yeah !!! I finally understood the ESOP funda. Thanks.
But, How do we decide on number of shares ??

I dont think u paid attention to slide 9

No ... what I meant was - How do we decide on number of shares in the company. 
That is - Out of 100% of the company - how many shares(number of shares) do we make 10000....100000 or a million.

???? thats a question of paid up capital

if u want a 1 lac paid up capital, you issue 1 lac shares of Rs 1 while starting the company.

Paid up capital attracts stamp duties in slabs!

Hi Alok

I liked the presentation -crisp and precise. Just wanted to add one point - there is something called a cashless transaction as well. In such a scenario, you do not have to pay money at the time when the shares get vested. Instead, when you sell (say at the time of IPO), the company sells the ESOPs on your behalf and pay you the amount after deducting the issued price and taxes. That way employee doesn't have to shell directly from his pocket for buying these shares.



Yes - its just that you pay short term capital gains rather than lower long term cap gains and IF you leave the Company in between, then securing shares can be risky...


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